Juncker’s investment plan is no silver bullet

The European Commission yesterday (26 November) launched its €300 billion investment scheme. It contained few surprises. The European Investment Bank (EIB) will add €5bn to a €16bn guarantee from the European Union budget, making €21bn. The Commission estimates that that sum can be leveraged to create an additional €315-€410bn of further investment in the EU economy, which will be channelled towards projects identified by the Commission and the EIB. This could create, the Commission estimates, an additional 1.3 million jobs. The Commission called on member states to top up the fund.

In presenting the plan, Jean-Claude Juncker, the president of the Commission, fulfilled a promise made to the centre-left in order to secure its backing for his candidacy. Weak investment was blamed for the eurozone’s anaemic recovery.

Juncker stressed that the investment fund was but one part of a three-pronged effort to drive up low levels of investment within the EU.

The second is identifying the right projects for investment. The Commission has indicated that the funds will target broadband and energy networks, transport infrastructure in industrial centres, renewable energy projects, education and training, and funding for SMEs and middle capitalisation companies.
The third prong involves accelerating plans to cut red-tape and make the EU more business-friendly.

MEPs from the centre-right and centre-left broadly backed the plans, while Syed Kamall, the leader of the European Conservatives and Reformists group, and Guy Verhofstadt, leader of the ALDE group of liberals, stressed the need for discipline in selecting the projects that would benefit.

15-fold leverage
In presenting his plan, Juncker battled to show that the €21bn capital base amounted to an “investment offensive”.

The fund’s forecast leverage – an average multiplier of 15 times – was described by the Commission as the result of “prudent estimates from historical experience”.

Part of the leverage effect would come from the public money being the first to take any losses that arose, making the investment more attractive for investors.

Fact File

Stability and growth pact?

Juncker called on EU member states to bolster the fund by injecting their own money. In particular, he hoped that those member states enjoying healthier public finances would contribute. “More growth in southern Europe can only be beneficial for Germany,” he said. “People should realise that our fates are all bound up to one another.” But significantly Juncker also announced that the Commission would propose allowing member states to discount their contributions to the fund from EU budget rules. This would make it possible for member states that a close to or above EU spending limits to contribute. It will be interesting to see whether France and Italy do so, having been strong proponents of an investment scheme, while at the same time being on track to breach EU budget rules in 2015.

Eliminating grants

“We are not just moving money around, we are maximising its input,” said Juncker. Part of this involves rewriting the way in which the EU distributes structural funds. Some 92% of structural funds are given out in the form of grants and loans. “This has to change. Once that money is granted, it is gone,” Katainen told MEPs. Instead the Commission envisages issuing loans, equity and guarantee.

Timeline

Mid-December: Commission-EIB Task Force to present a first list of possible investments

18-19 December: The EU Council will be invited to approve the investment plan.

Mid-2015: EFSI to be created and operational

Mid-2016: Commission and EU Council to review plan

2018-2020: Juncker held out the possibility of renewing the plan for three years

The money will be managed by the European Fund for Strategic Investments, an entity still to be created, which will be hosted and managed by the EIB.
Emmanuel Macron, France’s economy minister, warned last week that the fund should produce new money, which would come on top of the status quo, to the tune of €65-€80bn.

But Juncker yesterday retorted that “abundant liquidity allows Europe to grow without more debt”. He said: “We will not betray our children and our grandchildren”.

The Greens in the Parliament described the figures as “wildly unrealistic”. Bernadette Ségol, general secretary of the European Trade Union Confederation (ETUC), also doubted how realistic the Commission’s projections were: “The European Commission seems to be relying on a financial miracle like the loaves and fishes.” She added that the sum would make up only 40% of the “annual investment shortfall since the crisis”.

It is all about the single market
What is apparent from the timeline over which the fund will be created and the amount involved – not least since it is spread over three years – is that the money will not be the silver bullet that propels the EU economy on the road to recovery.

Jyrki Katainen, the Commission vice-president for jobs, growth, investment and competitiveness, said as much yesterday when speaking of the third prong of the Commission’s strategy: “Deepening the single market is the most important part of our work and can change Europe permanently,” he said.

This echoes comments made by European industry.

“The new Commission’s €300bn investment plan can play an important role in stimulating private investment,” said BusinessEurope, an industry association. But, it continued, “if we are to lay the foundations for our future competitiveness and prosperity, we need a step-change in efforts to tackle the obstacles hampering private investment and to optimise the use of public investment in Europe”.

This involves bringing down energy costs for businesses, reducing taxes on labour and capital, introducing a degree of harmonisation for corporate tax rules and making labour markets more flexible, said Markus Breyer, the director-general of BusinessEurope, at a press conference on Tuesday (25 November).

That sentiment was echoed by European Telecommunications Network Operators’ Association. It said yesterday: “We welcome in particular, the call for a ‘clear, predictable and stable’ regulatory environment and the objective to ‘remove sector-specific regulation hampering investments’. A reform of the current regulatory framework for telecoms has the potential to greatly help the sector to grow and innovate.”

Reforms of the single market can take years to adopt and years to implement.